Will Prepaid Cards Overtake the Debit Card?

Odysseas Papadimitriou

Wednesday, 12 Sep 2012 | 2:02 PM ETCNBC.com

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The debit card has arguably been one of the most popular products of the past century. It has untethered consumers from bank branches, allowing them to withdraw cash on the go or, by using their debit cards as credit cards, do without cash altogether.

Their phenomenal growth has made Visa and MasterCard debit cards in particular the most popular non-cash form of payment. Given their success, it’s remarkable that the debit card hasn’t invited serious competition. Until now.

In October 2011, the Federal Reserve capped the amount big banks can charge retailers each time debit cards are swiped in their stores. Without this income, checking accounts became more expensive for banks to maintain. They responded by increasing fees, decreasing debit-card rewards —and putting more emphasis on prepaid card programs.

Prepaid cards offer consumers advantages too. Because you can only spend the set amount you’ve prepaid, the cardholder's account cannot be overdrawn, as it can with a check (and sometime with a debit card). Nor can a prepaid card affect your credit rating, as credit cards can. (Read more: The Four Financial Tools for Living Abroad)

Prepaid cards can substitute for checking account, too, and serve as a method of cashing checks. And though paying your kids’ allowance via a prepaid card will likely be more expensive than giving them cash, a prepaid card can give them experience managing a financial account, using ATMs, and budgeting.

Perhaps most importantly, consumers now have an alternative to debit cards. The only feature of traditional checking that prepaid cards don't bring to the table is a checkbook. But many consumers will gladly sacrifice their checkbook if they can save money, giving prepaid cards have a real chance of encroaching on the debit card’s turf. (Read more: Prepaid Cards Move Beyond the 'Underbanked')

The trick to picking the right prepaid card is, firstly, knowing what you want the card for and then selecting a card that charges the lowest fees on your intended purpose. Prepaid cards are still largely unregulated (though that is changing) and may come with fees as high as $300 per year, according to Card Hub’s 2012 Prepaid Card Study.

Below, we’ve listed the best prepaid cards, based on what features they offer and the fees they charge. (See Card Hub’s full list of prepaid cards here.)

Use: Alternative Checking AccountImportant Features: To operate like a checking account, the card must offer direct deposit and online billpay, so you can load your monthly paycheck and pay vendors who don’t take plastic for their bills. An expansive ATM network is also important.Fees to Avoid: Because you’ll be using this card frequently, you want to charges for purchases and ATM withdrawals. Also look for cards that have low or no activation and monthly maintenance fees. Lastly, pick the suitable card with the largest ATM network.Best Card: GreenDot Gold Prepaid Visa - This card can be free to use if you directly deposit $1,000 or more per month and only use GreenDotATMs, of which there are 22,000 around the country.

Use: Financial ‘Training Wheels’ for KidsImportant Features: Since you’ll be loading money onto this card, it’s important that you be able to do so via a bank account; don’t worry about direct deposit and online bill pay. The card should also offer online account management as well so parents can review spending habits with their children.Fees to Avoid: To keep your child’s allowance from being eaten away by fees, get a card that has minimal or no monthly fees, and does not charge for ATM withdrawals or purchases – the only transactions young people are likely to make.Best Card: Kaiku Prepaid Card - This card charges a relatively low $1.95 monthly fee, does not charge for making purchases, and offers free withdrawals at AllPoint’s 43,000 ATMs nationwide.

Use: Check CashingImportant Features: You need a card that will let you load checks directly to the card via an ATM—having to load cash would be costly and redundant.Fees to Avoid: If your only goal is to convert checks to spendable cash quickly, there’s no need for automatic deposit or online bill pay, and if you don’t use the card itself as a payment method, you can sustain per-purchase fees as well. Instead, minimize monthly maintenance fees, fees for loading funds via check, and for accessing money at ATMs.

Best Card: Chase Liquid Card: There is no cost for loading this card with checks or making withdrawals at Chasebank branches and ATMs. Its only fee of note is a $4.95 monthly fee.

No matter which prepaid card you choose, review your options often. The payments industry is in flux at the moment, and as more and more major banks introduce prepaid cards to the market, the offers will inevitably get sweeter. As long as you know what you’re looking for and do not get swayed by flashy celebrity branding, you can turn the changes into advantages.